Edited version of private ruling

Authorisation Number: 1011771678244

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Ruling

Subject: Am I in business

Question 1

Are you carrying on a business in relation to your short-term accommodation unit?

Answer

No.

Question 2

Are you eligible for the Entrepreneurs Tax Offset pursuant to section 61-505 of the Income Tax assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are the owner of a unit at a short-term accommodation complex.

You are a beneficiary of a trust which owns a unit in the short-term accommodation complex. You receive 100% of the income from this unit.

Each owner in the short-term accommodation complex is entitled to a proportional interest in a unit which comprises the short-term accommodation office and manager accommodation.

The management agreement provides for the owner to grant occupancy rights to the operator and the operator pays the owner for the occupancy rights by reference to a formula whereby the owner is entitled to a share of net profit derived from the pooled units.

There are a number of units in the short-term accommodation complex which are pooled and managed under an Agency Agreement. Your unit is in this pool.

You receive quarterly distributions from a pool as per the agreement.

You pay the rates on your unit.

You are not actively engaged in the management of this unit.

You registered for an Australian Business Number (ABN).

The operator has deducted amounts from the distributions received that went towards working capital.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 61-505.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The issuance of an ABN and an increase in your contribution to working capital are not by themselves indicators that you are in business. Having regard to all the facts provided it is considered that you are not carrying on a business. As you are not carrying on a business, you are not eligible for the Entrepreneurs Tax Offset.

Detailed reasoning

You received advice in respect of these questions in an earlier private ruling. You received further advice in an informal review of that earlier private ruling. The review considered Hance & Anor v. FC of T [2008] FCAFC 196 (Hance's Case) as you believed the facts in that case were the same as yours.

The review did not change the original decision and you were unable to object to the ruling as the assessment had already issued.

You then applied for a private binding ruling in respect of these questions for the following year as the income tax return had not been lodged. For this application your questions were considered with reference to Hance's Case and the agreement you have with the operator that carries on the short-term accommodation business.

You objected to the assessment for that year. You received an objection decision acknowledging that the facts in your case had similarities to the facts of Hance's Case but as the case did not involve the letting of property, it did not apply to your circumstances.

The arrangement that is the subject of the current private ruling application is the same as that in your private ruling for the previous financial year except that you now advise that you have registered for an ABN and have increased your contribution to working capital.

Miscellaneous Taxation Ruling MT 2006/1 states that you are entitled to register for an ABN if:

(a) you are carrying on an enterprise in Australia; or

(b) in the course or furtherance of carrying on an enterprise, you make supplies that are connected with Australia.

To be entitled to an ABN you must be carrying on an enterprise in Australia. An enterprise, among other things, is an activity or series of activities done in the form of a business. Your enterprise, if it is in the form of a business, must have commenced trading or have undertaken sufficient activities to establish an enterprise.

Miscellaneous Taxation Ruling MT 2000/2 states that if you let out residential premises where the whole of the premises is to be used predominantly for residential accommodation purposes you do not need an ABN for PAYG withholding purposes. This is because the supply will be input taxed and excluded from the requirement to withhold amounts from payments in relation to a supply.

The issuance of an ABN is not in itself an indicator of whether or not you are carrying on a business. Although you may be entitled to register for an ABN, it is not necessary. Even though you have now registered for an ABN, it has not changed the fact that you are not carrying on a business.

An increase in working capital is an increase in available funds to pay the ongoing costs in the day to day running of the complex by management. The increase in the contribution of working capital made during the year does not indicate that you are carrying on a business.

As you are not carrying on a business, you are not eligible for the Entrepreneurs Tax Offset.

The advice provided to you in your last private ruling is reiterated here for your information.

The agreement states that you, as the owner, grant to the Operator, occupancy rights to your unit(s) and the Operator manages your property, collects rental income which is calculated according to a formula. Rental income from all the available units is pooled and a distribution is calculated based on the number of days the property was available over the total days available multiplied by the net profit generated by the short-term accommodation business.

Whilst it is acknowledged that the arrangement whereby income is allocated from a pool is not the usual way rent would be derived, it is nevertheless rental income. The owners of the units do not carry on the hotel business. The operator is the entity carrying on a hotel business.

In Hance's Case, a business was carried on through an agent and the owner of the property was also regarded as carrying on the business because it was ruled that if the agent wasn't engaged, the owner would be carrying on the almond activity as a business.

In your case, your activity in respect of your interest in the units would not amount to carrying a short-term accommodation business as such in the absence of a business operator and the scale of activity afforded by the large number of units made available by other owners.

The advice provided to you in the informal review is reiterated here for your information.

As discussed in the explanation to your private ruling, a person who simply owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business. This is because of the limited scope of the rental property activities and the limited degree to which an owner actively participates in rental property activities.

Whether an individual is carrying on a business of letting property (or is merely an investor) depends on the activity pursued and the scale of operations, rather than the number of properties invested in. This issue has been considered in a number of cases, some of which are discussed below.

In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202, the taxpayer and his wife purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his wife were mere passive investors and were not in the business of deriving income from rental properties. They rejected the taxpayer's argument that he had greater involvement with his 16 properties.

In 11 CTBR (OS) Case 24, the taxpayer's income included rents from three properties. The taxpayer employed a manager and accountant - he was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said:

It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices, &c., and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner'

In 15 CTBR (OS) Case 26, the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats.

On the other hand, Case G10 75 ATC 33; 19 CTBR (NS) Case 103, involved a taxpayer who owned a block of holiday flats for short term lettings at a beach short-term accommodation complex. Helped by his wife, he also managed and maintained the six flats, which were let furnished. This involved the hiring out of linen, laundering, showing visiting inquirers over the premises, correspondence, collecting all moneys payable and banking, most of the cleaning, the mowing of lawns, internal and external painting, taking care of the boiler room and various running repairs. It was held that the taxpayer's activity in owning and managing his holiday flats constituted the carrying on of a business. The elements of repetition and continuity of acts and transactions were sufficient evidence of the existence of a business. The taxpayer was actively engaged personally from day to day in multifarious activities directed to the profitable operation of his income-producing holiday flats. His was not a case of a person who simply owns flats which bring to him income vicariously through a letting agent. In reaching its decision the Board of Review stated:

His task in managing and maintaining the flats was, as he said, a 'seven day a week job and hard work'. It was clearly established in evidence that the money received by the taxpayer from the occupants of the flats was not solely a payment for the right to rent a flat for a certain period. It was a payment as well for the hire or bailment of furniture, furnishings and chattels and for the provision of services which would otherwise have to be supplied by letting agents, contractors and workmen. The evidence is that there would have been an outlay of about $900 to $1,000 a year on lawn mowing and painting if the taxpayer had not done that work himself. … the facts of the present case establish that taxpayer's income represented the proceeds of the business of providing fully furnished holiday flats with all the associated work.

In your letter you have stated that the circumstances in Hance & Anor v. FC of T [2008] FCAFC 196 (Hance's Case) are similar to yours.

Hance's Case involved a taxpayer who proposed to participate in a managed investment scheme involving the growing of almonds. Under the scheme the taxpayer was to sub-lease 'Almondlots' comprising one hectare of land, and grow almonds thereon. The taxpayer was to engage the company promoting the scheme to manage the Almondlots, and to harvest and sell the almonds on his behalf. The taxpayer's almonds could be pooled for sale with the almonds of other growers. The Commissioner submitted that the taxpayer would not be conducting a business for various reasons, including that he would have delegated his responsibility for management of his Almondlots. It was held that the taxpayer would be carrying on an individual business on his Almondlots, and that he was not the beneficiary of a trust.

It is acknowledged that the facts in your case have some similarities to the facts in Hance's Case, in a number of units (including your unit) in the short-term accommodation development are pooled and managed under an agency agreement. However, it is considered that Hance's Case does not apply to your circumstances as it does not involve the letting of property. The decision is in respect of a managed investment scheme involving an agricultural pursuit.

As can be seen from the decision in 11 CTBR (OS) Case 24, discussed above, the fact that a taxpayer employs a manager to assist with the letting of properties will not make any difference to whether the taxpayer is carrying on a business.

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